Videotron launches Canada's first phone-over-cable service

The term "cable service" has taken on a whole new meaning for more than 300,000 households in Montreal's South Shore.

Videoton Ltee., a subsidiary of Montreal-based Quebecor Inc., became the first major cable company in Canada yesterday to offer a residential telephone service through the same communications "pipe" that delivers cable TV and high-speed surfing on the Net.

"Consumers now have access to an alternative that will radically transform traditional telephone service," said Robert Depatie, president and chief executive officer of Videotron. "Our investment in the telephone market is part of a worldwide trend."

The launch is a direct attack on the home turf of Bell Canada, which until now has had an iron grip on the local phone market. In Bell's operating territory in Ontario, Rogers Cable is planning to launch its own phone-over-cable service this summer, likely followed by Cogeco Cable.

Before the end of 2005, most Torontonians could have the option of getting their phone service through their local cable company.

The Videotron phone service began as a 2,500-household trial last fall and became available yesterday to most residents of Montreal's South Shore. The company plans to serve its territory across Quebec by the end of 2005 and has the capacity today to take on 200,000 subscribers.

It is believed to be the first cable phone service in the country based on Voice over Internet Protocol, or VoIP, which is proving a viable a way for cable companies to enter the $10 billion a year local phone market.

"Videotron has thrown the gauntlet at Bell," said Eamon Hoey, a telecom consultant with Toronto-based Hoey Associates Inc. "They're going to do damage out there, without a doubt."

Videotron has about 1.5 million cable customers and 527,000 high-speed Internet subscribers. Hoey said part of the reason Videotron will gain phone customers is because of a pent-up demand for something other than Bell.

But pricing is also expected to be a key factor. Videotron is offering its phone service for $15.95 a month to customers who already subscribe to its cable and high-speed Internet services. It will cost $4 to add the first touch-tone feature, such as call waiting, but only $2 for each feature after that.

Videotron's customers will also be offered unlimited long-distance calling to anywhere in Quebec for $4.95. Installation of the service is also free, as are long-distance calls to other Videotron phone subscribers.

Dvai Ghose, a telecom analyst with CIBC World Markets, said a qualifying Videotron customer who gets the local service, two features and the long-distance package could end up paying 39 percent less than a comparable offer from Bell.

"This is significantly more than the 15 percent or more discount we had expected," Ghose wrote in a research brief.

In contrast, new customers get less than a 10 percent discount. Analysts said the pricing scheme rewards existing customers with low-cost telephone service by getting them to sign up and stay loyal to multi-product bundles.

Asked whether the approach will make money for Videotron, Depatie replied: "Being part of Quebecor, we don't tend to launch businesses that don't make money."

Brian Sharwood, a telecom research analyst with Seaboard Group in Toronto, said Rogers will be watching Videotron's experiences in Montreal closely as it readies its own ambitious phone service — tentatively scheduled for July 1.

"Rogers is proceeding carefully to make sure it doesn't come out too early or with the wrong product," said Sharwood, adding that Rogers has been stung too many times in the past with everything from negative-option billing to its disruptive relationship with At Home Corp.

"The company is still haunted by bad PR, so this clouds their view of how aggressive they want to be. They're careful not to step too far out for fear of having another backlash."

Like the service Rogers is planning, Videotron's phone plan offers back-up power, emergency 911 and the ability to keep your old phone number. Depatie said video calling and unified messaging will be added in the future as the network is upgraded.

Sharwood said Bell, like Rogers, will likely watch, wait and learn as Videotron rolls out its phone service. Bell can't discount its local phone prices to compete against a lower-priced VoIP rival, though it is hoping the federal telecom regulator will change that rule.

Bell's most immediate way of competing on price is to offer call display, call waiting and other touch-tone features for less or free. "Those features are unregulated, so Bell can do what it wants with them," said Sharwood.

Many of those features are already offered for free through Vonage, Primus Canada and many others who have entered the residential VoIP market over the past year.

Those services differ from Videotron's offering because they ride over any high-speed Internet connection, meaning the firms selling them can't control the quality of their product.